Are Returns from Smart Grid Investments Too Weak for VCs?

The smart grid might be the Megan Fox of cleantech right now (hot), but will venture-backed smart grid startups be able to deliver the type of returns that VCs commonly like (somewhere around 10 times their investment)? Not really, suggested venture capitalist Vinod Khosla at the AlwaysOn GoingGreen conference in Sausalito, Calif., earlier this month (watch the video clip here). During a panel on the first morning of the event Khosla called smart grid investments from a VC perspective “interesting, but marginal,” at “10 to 15 percent.”

Indeed, Khosla hasn’t made any direct investments in bringing information technology to the power grid over the years, despite the fact that he played a fundamental role in the development of information technology — as co-founder of Sun Microsystems and an investor with Kleiner Perkins funding broadband firms like Juniper.

Ford Tamer, Operating Manager for Khosla Ventures, explained Khosla Venture’s smart grid strategy in more detail with us at the conference, saying that the company is actively looking at smart grid investments, but is searching for ones that could provide a bigger jump in technology innovation. In essence, the smart grid is basically made up of information technology, and given that the sector has been under development for a decade and is mature in many ways, it’s harder to create revolutionary innovations there, compared to a sector like batteries or biofuels.

Khosla’s comments at the Always On conference weren’t the first time he’s indicated that he’s bearish on the smart grid sector. Back in May at a Forbes conference, he said the planned stimulus-package investments into the smart grid sector aren’t the best use of those funds and said he would choose to allocate funds to the transmission grid (which just involves power lines for transmission) over a smart grid (which makes the grid responsive).

So how have the returns been on smart grid companies so far? It’s hard to say because the sector is so new. A first-generation (sort of) smart grid company that provides demand response services, EnerNOC, went public in 2007, and according to Bloomberg, EnerNOC investor Foundation Capital saw its stake triple to $77 million recently from its investment of $21 million. That’s a nice return, but it’s no 10x.

Other exits in the sector have recently occurred with energy management software startups like Greenbox (bought by Silver Spring) and Lixar SRS (bought by GridPoint). Neither company raised much funding before it was bought, and while neither firm disclosed the acquisition price, they were likely pretty low.

One of the biggest indicators of possible returns for the sector will be what happens to Silver Spring — if the company goes public or gets bought for a lot in 2010, that could prove the potential for relatively strong returns in the sector. But 10 times the investment? Well, we’ll just have to wait and see.